Inflation, Higher Rates, and Man vs. Machine

Inflation, Higher Rates, and Man vs. Machine
Inflation, Higher Rates, and Man vs. Machine
Inflation, Higher Rates, and Man vs. Machine Getty Images

Danny’s View:

Why did the equity futures rally so much on Friday? Well, the simple answer is because they could; but the real answer is Berkshire Hathaway purchase of 75 million shares of Apple. That pushed the Nasdaq Composite up 121.47 points, or 1.7%, to 7209.62, leading the rest of the markets higher.

Last week, the Federal Reserve acknowledged that U.S. inflation has picked up, adding to the idea that interest rates will rise faster this than expected this year. The Fed indicated last week that if inflation data figures remain strong, the view that rates might go up could be cemented this week.

Just as we knew the VIX wouldn’t stay so low forever, we also knew rates could not remain at historically low levels forever; and while the fear index has already proven that interest rates are clearly set to go higher, It’s my guess there are three more rate hikes due this year.

The looming question is, how will this affect the S&P 500 down the road? While I always say, “I’m a bull but I ain't no fool,” I also think the overall price action of the stock market has changed, and not necessarily to the good side. The number of 40 to 60 handle drops and rallies in one day are unprecedented. Some people say that we have seen this before, but I think they are 100% wrong.

The other side of this coin is how the news headline algos rule the tape now. In the past, they were an important factor, and their influence has only increased.  With so many headlines battering the news services, we can see who (or what) is running stock markets. In the battle of Man vs. Machine, it is very clear who is winning: we are totally out-gunned.

Patterns Matter

On the charts, it looks like higher prices are coming. However, the most recent patterns show the equity indices rallying on Monday, then moving down early into the mid-week, and finally rallying late in the week. 

The other pattern that has been showing up is that the futures start selling off just before 2:00 p.m. CT when market-on-close imbalances start showing up to sell.  

Our View

Our view is to sell the higher opens or early rallies and buy weakness, remembering the patterns I have mentioned above. I still look for the market to potentially move up to the 2683-2690 area and a near-term upside target. 

The chart of the S&P below shows price action over the past year with trendlines converging since late January of 2018, with price currently at 2671.25. 

The economic calendar for the first two days of this week is very quiet and should mostly be a non-factor.

Economic Calendar

Monday

  • 4-Week Bill Announcement 11:00 AM ET
  • 3-Month Bill Auction 11:30 AM ET
  • 6-Month Bill Auction 11:30 AM ET
  • TD Ameritrade IMX 12:30 PM ET
  • Tom Barkin Speaks 2:00 PM ET
  • Consumer Credit 3:00 PM ET
  • Robert Kaplan Speaks 3:30 PM ET
  • Charles Evans Speaks 3:30 PM ET

Tuesday

  • NFIB Small Business Optimism Index 6:00 AM ET
  • Redbook 8:55 AM ET
  • JOLTS 10:00 AM ET
  • 4-Week Bill Auction 11:30 AM ET
  • 3-Yr Note Auction 1:00 PM ET

 

 

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